Small Cap Value Report (Fri 14 Feb 2020) - TRI, INDV,

Good morning, it's Paul here with Friday's SCVR.

It's quiet for results/TUs today, so I'll circle back to a couple of stragglers that I didn't have time to look at earlier this week.

Estimated time of completion is 1pm

Edit at 12:26 - today's report is now finished.

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I'm pleased to see that Elon Musk has followed up on my suggestion, to take advantage of the crazy rise in share price at $TSLA to do a fundraising of c.$2bn. Apparently this is a fortnight after he had confirmed that there wasn't going to be a fundraising. He gets away with murder, doesn't he! Anyway, it's most pleasing to note that he obviously reads the SCVR ;-)

This is a point worth emphasising actually, about fundraisings in times of share price strength. Any company that has a soaring share price, and a stretched valuation, should take advantage of that to do a top-up fundraising. Bull markets present a golden opportunity to fix balance sheets, pay off debt, and protect a business in advance of the next recession.

Yet hardly any management teams seem to anticipate the economic cycle. This is very strange. Why is it, that in the sphere of finance/economics, humans keep making the same mistakes without learning from them? Despite events following very clear cycles - both in terms of the stock market, and the economy as a whole.

Conditions now are looking increasingly similar to the boom conditions in 1998-99, and 2006-7. In both those times, I remember stock market valuations becoming very high, especially for growth companies. Optimism seemed boundless, people who warned about trouble ahead were ignored (because they had been consistently wrong for at least 5 years, so people stopped listening - even though we all knew that we were in a bubble!). Corporates and individuals were borrowing too much, leading to inflated asset prices, over-investment, and over-consumption.

Then something happens to prick the bubble, and economies slide into recession, stock markets tumble, and lenders start withdrawing credit.

I can't help feeling that we're nearing the end of this current bull cycle. Maybe another year or two before it all blows up? It feels like that to me.

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Trifast (LON:TRI)

Share price: 166p (down 4%, at 08:36)
No. shares: 123.9m
Market cap: 205.7m

Trading update (mild profit warning)

International specialist in the design, engineering, manufacture and distribution of high quality industrial and Category 'C' fastenings principally to major global assembly industries.

The Board of Trifast provides the following unaudited trading update covering the Q3 financial period and up to the date of this announcement.

Trifast has a 30 March 2020 year end. Therefore this TU covers Oct-Dec, but also current trading in Q4 to date.

It's a profit warning I'm afraid -

In our Half-year results for the six months ended 30 September 2019, we commented that in the current financial year we expected trading to be weighted towards the second half in line with our normal trading pattern. However, since our announcement in November 2019 market conditions have become more challenging than had been anticipated, reflecting greater volatility of results in Q3, and a slower than forecast start to Q4 (the latter being historically our strongest quarter in the financial year).

The financial impact doesn't sound too bad at all - lower end of analysts' forecasts is OK, given that the forward PER isn't high;

The impact of this weakness has continued to constrain revenue growth across a number of our sectors. With a corresponding reduction in gross and operating margins against a semi-fixed cost base being further impacted by deferred start of production dates.

As a result, following a review of our year-to-date results and an update to our Q4 forecasts, the Board has concluded that the Group's underlying profit before tax in FY2020 is now expected to be at the lower end of analysts' forecasts.

I think shareholders should be quite relieved about that, I was expecting far worse, given the previous comments.

Coronavirus - doesn't sound like it's a major threat -

To date the impact of the Coronavirus epidemic has been restricted to the extended closure of our Chinese sites and a corresponding reduction in locally generated revenues. It is not possible at this time to assess how extensive any longer term impacts will be, but we are already working closely with our customers and supplier base, only c.10% of which originates in mainland China, to minimise these risks as far as possible.

I do wonder though, if there might be a knock-on effect? i.e. other suppliers outside China might rely on Chinese raw materials perhaps?

Outlook - "Project Atlas" sounds interesting - to drive efficiency, with "at least a 25% return on investment", which sounds good. Shorter term benefits are said to be slower than originally anticipated. I read that as meaning that profit forecasts will need to be trimmed a little in the short term.

Upbeat commentary about the medium-term future, hence not so great in the short-term;

Notwithstanding the current high levels of uncertainty, we are pleased to report that our pipeline of new wins is strong and activity levels around the Group continue to be encouraging. This means despite a challenging FY2020 the business remains well positioned in its markets and we are optimistic regarding prospects for revenue growth in FY2021 and beyond.

We are encouraged and supported by the fact that we have lost neither business nor customers over this difficult period and continue to hold preferred supplier status at a wide range of large manufacturers across the globe. The strong long-term fundamentals of our business model and strategy are unchanged and the Board continues to be optimistic for the medium-term future.

Updated forecasts - nothing available as yet. I will update this section if/when updated forecasts come through.

My opinion - a key omission from this update was a footnote showing what the range of analyst expectations are. This wastes time for everyone reading the announcement, as we now have to look it up. Please include this information in all trading updates, people who write & review RNSs (Peel Hunt and TooleyStreet Comms in this case). In all other respects, this announcement is clear, and well presented.

Nothing is said about the problems in the automotive sector, which must be affecting Trifast, as factories are slowing down production in some cases. Germany in particular is already struggling economically, and will be hit very hard by reduced demand from China, its main export market.

A niggling doubt I have, is that the financial impact of the above seems too mild. I wonder if the FD might have released some provisions, to soften the impact?

Let's see what the analysts do to forecasts. I'll update above later, if I get the info I need.

As things stand, I note that TRI shares had already fallen in recent days, presumably anticipating coronavirus fears & softer trading?

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Macro factors must surely be mounting on Trifast. Therefore, I can't see any reason to get involved here for the time being.

Note that broker forecasts have been steadily falling, and I'd expect more downgrades given the company news today, and disruption to global supply chains.

Note too that the Stockopedia tech team have fixed the y-axis on my favourite graph below! Please could Haynes shareholders return my bunting from yesterday, as I want to celebrate this (one of many improvements to the new site here, coming thick & fast!). I'm happy that the new site is now better than the old site, so I've switched permanently to the new Stocko site.

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Indivior (LON:INDV)

Share price: 39p (down c.20% yesterday)
No. shares: 731.7m
Market cap: £285.4m

Final results

This is a speciality pharmaceuticals company, that I've never looked at before. It used to be worth several billion, so something has clearly gone disastrously wrong, for it to now be a small cap. Graham wrote a very interesting piece about it here in July 2018, pointing out that the fall to 270p per share was due to a generic alternative to INDV's key drug, Suboxone.

With the price now a fraction of that, and Stockopedia showing that its cash pile is more than the market cap, curiosity got the better of me last night, so I did a bit more digging. What could the catch possibly be?

My favourite chart (now with a y-axis!!) gives a good clue - earnings are collapsing;

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Also, the FY 12/2019 numbers have clearly disappointed the market, with a poor, loss-making Q4.

Legal claim - however, the main reason this share looks so cheap, has to be this;

On April 9, 2019, a federal grand jury in the Western District of Virginia indicted Indivior PLC and Indivior Inc. on charges of health care fraud, wire fraud, mail fraud, and conspiracy, in connection with the marketing and promotion practices, pediatric safety claims, and overprescribing of SUBOXONE® Film and/or SUBOXONE® Tablet by certain physicians. DOJ is seeking to recover $3 billion in monetary forfeitures and all

My opinion - the legal claim makes this share uninvestable for me.

It's so huge, that to value the share correctly, you would need to become an expert in its legal problem. Nothing much else even matters, given the size of the claim. There also seem to be other legal things going on. Note 12 to the accounts gives chapter & verse.

Because of these massive legal claims, I can't take this investment idea any further, other than to say I won't be revisiting it!

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Unfortunately, I can't find anything else of interest, either today, or in my notes from earlier this week.

Therefore, I'm going to sign off the the day, and the week. Have a terrific weekend!

Best wishes, Paul.